Reinsurance For Takaful Business

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Reinsurance for Takaful business

Re-Takaful is the name given to the Islamic form of reinsurance and is based on the principles of Shariah. In other words, Re-Takaful is the reinsurance of ‘Takaful‘ business, the writing of insurance policies according to Islamic principles. Reinsurance is a form of insurance whereby an insurance company can transfer to another insurer (the reinsurer) all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes. This enables the an insurance company (reinsured or direct insurer) to protect itself against the risk that its total claims costs in any one year maybe so large wiping out its profits, or even cause it to be insolvent. This is the essence of the concept of social solidarity, cooperation and mutual indemnification of losses of members whereby there is joint indemnification of the loss or damage that may occur, out of the fund that is collectively contributed to. Takaful and Re-Takaful businesses both play a crucial role in managing and mitigating the risks in Islamic finance. This lesson will look at the difference in the practice of reinsurance in Takaful and why it is a necessary function.

Reinsurance Practice

Reinsurance is a way for the insurer to transfer part of the risk to a Reinsurer. The insurance company will normally reinsure only the amount in excess of its normal capacity for a particular risk, not necessarily a fixed proportion of every risk. Normally there is a maximum amount to which the reinsurer will insure, over this they are not liable. The long term market and the short term market use reinsurance to allow them to take on a larger share of a risk than they would normally be able to. When insurers place reinsurance they will receive commission from the reinsurer. Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.

Principles Functions of Reinsurance

The functions of reinsurance are manifold and are not always directly apparent. The three main functions are set out below.

Carrying Risk:the principle function of reinsurance is to carry risk. By indemnifying insurance contracts with policyholders, the direct insurer is taking on risk, because it gives policyholders a premium that is linked to the chance of an event happening in the future. The risk that the direct insurer has taken on may be so great that had if it had a partner is willing to take part of the risk. In this sense the reinsurer is a risk carrier.

Funding Risk:Closely related to the reinsurer’s risk-carrying function is the function of providing funding for the risk. The reinsurer put the direct insurance company in the position to take on payment obligations on a scale that it would have otherwise been able to offer to taken on without the reinsurer’s support or other source of outside funding. This applied especially to young companies and to companies intending to offer new lines of business products. In such cases the reinsurer can provide the initial funding to start up the new lines of business products.

Advice and Services:Apart from carrying and funding risk, reinsurer can benefit the direct insurer in other ways, such as advising before the direct insurer concludes an insurance contract. The advice given can range from assistance in designing specific reinsurance contracts to help in structuring the direct insurer’s entire reinsurance programed.

Risk Management

Reinsurance is the direct insurance company’s insurance. By sharing in the direct insurer’s risks, the reinsurer relieves the direct insurer of a part of its risk burden and limits the reaming risk for the direct insurer. Reinsurance also enables the direct insurer to underwrite risks over and above the amount which its own financial strength would allow the direct insurer to take on a single risk. When underwriting risks, the direct insurer is also subject to limitations imposed by statutory regulations. Here too, the reinsurer is an instrument that the direct insurer can use to raise the underwriting capacity that can be offered to the policyholders.

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